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Financing the EMUs – Is the Government Clipping the Ticket?

One of the things I have being trying to find out recently is more details about the financing arrangements for our new electric trains. We already knew that the government had decided that they would fund them by loaning the money to Auckland Council but we didn’t know much else about it. Thanks to the results of an official information act (OIA) request to the NZTA we can now shed some more light on how the trains and the depot are being paid for (this is my own OIA request and not one passed on by anyone else). The OIA request provided three board papers on the topic, from June (854 KB), August (1.6 MB) and November (116 KB).

The financing arrangement has quite a few parties involved so I will try to explain it as best I can. First up there are actually a few different things that are being brought, we are getting 57 brand new electric trains (EMUs) and a brand new depot to maintain them. For the trains there will also be a maintenance contract in place to keep them looked after for the first 12 years of service. This table breaks down the costs although the maintenance is not included as presumably that was agreed to after the paper this came from (June) was presented to the NZTA board.

All up the papers indicate that the total costs of the project will be about $630 million. This would make the maintenance costs about $4 million per year which seems pretty good as by comparison our current clapped out fleet of trains cost about $15 million per year to maintain.

So how is this all being paid for, well that’s where things get quite interesting. The government is providing a loan of $500m towards the project that Auckland would have to pay back. It also announced that it would give a direct grant of $90m towards the project and that any costs above that amount ($40m) would have to come from Auckland somehow. Of course the devil as they say, is in the details and there are quite a few of those.
The $500 loan levied from Treasuries Debt Management Office (DMO) to the Auckland council. It will actually comprise of two loans, one for the EMUs of $400m at a term of 35 years and the other one for the depot of $100m at a term 50 years. That part does make sense, 35 years is probably about the lifespan of the trains while the depot is something that will likely last a lot longer. The interesting part comes in the form of what the council is being charged. The DMO will charge the council at the government bond rate, which the amount the government can get the money for, plus 1.25% (more on this shortly).

The council will then pass this loan along with the additional $40m required on to Auckland Transport who will pay the loan off. That loan will be paid off through a mixture of funding from the council, funding from the NZTA and fares from passengers. The funding from the NZTA for rail has historically been set at 60% however over the next decade this will reduce to 50% dropping by 1% per year. This diagram hopefully helps to explain some the setup.

Now as mentioned previously the DMO is charging the loan out at the government bond rate plus 1.25%. That might not sound like much but over the life of these loans it will end up being a considerable chunk of money, in fact some quick calculations show that over the life of these two loans we will be paying about $130 million in interest over and above what money costs the government. Of that $130m about half of it will be coming directly from rate payers with the other half coming from the NZTA. I can understand that there may be some extra costs involved in arranging things but should the government really be trying act in what is more like a commercial manner by collecting a margin on the loan? As the title of the post indicates, it sounds like they are clipping the ticket.

Another interesting thing that these papers reveal is in regards to the $90 million contribution that the government said it was giving to Auckland. The table below may have parts blacked out but it indicates that a large portion of the $90m is actually coming from existing and expected under spends in both the DART and Electrification projects. This is important for two reasons, the first is that it is money that was actually already planned to have been spent on rail in Auckland but the second and perhaps most important part is that both of those two projects appear to have come in significantly under budget. Coming in under budget for large roading projects has been a common occurrence in recent years so seeing it also happen with rail projects is positive. This is also important as another, even larger rail project is currently being talked about in the form of the CRL and even coming in 5% under budget could shave $100m or more off the total cost.

There are lots of other interesting bits revealed in these papers. One of the best outcomes from the tender is the fact that we are now getting 57 EMUs, we were initially only going to get 38 of them and then around 13 electric locomotives to pull the existing SA carriages around. The reason that plan was eventually dropped was that when the whole of life costs were considered it was clear that the cheaper option was to get the new trains and the papers indicate that it was cheaper by about $46 million.

Another aspect touched on in the papers is the total costs that will be associated with running the system including which as far as I’m aware includes everything from the track access charges to running services as well as the loan payments. A number of different options were modelled as the image below shows. The paper indicates that at the time it was written the amount of money coming from the National Land Transport Fund was $39m, this is significant as while there is expected to be a funding buldge in the coming years, in a decades time the expected level of funding will come back and only be $42m while over the same period the amount of money collected from fares will increase from $28m to $55m

Overall there is quite a bit of detail in these papers but it would be really good to have an explanation as to why Auckland rate payers will be paying millions and millions of dollars in extra interest to the government.

15 comments to Financing the EMUs – Is the Government Clipping the Ticket?

  • Peter M

    Yes I always thought it did sound a bit too good to be true when the government announced they were chipping in $90 million to help cover the extra costs of going from 38 EMUs to 57. Looks like they’re screwing that money out of Auckland two times over: first with it not actually being extra money (take the political credit without having to spend anything, genius!) and secondly through “clipping the ticket”.

    Why am I not surprised though?

  • Seems a bit on the nose to be paying 1.25% above the bond rate. Also can someone confirm if annual track access charges are $25m per annum? It wasn’t that long ago that the Govt paid $81m for outright ownership of the rail track in Auckland

  • Are the terms of repayment such that a new govt in 2014 could quickly remove the requirement to collect a margin on the loan?

  • AS

    Interest costs usually reflect repayment risk. Since repaying these loans partly depends on passenger revenue, there is probably a bit more risk than general government debt.

  • greenwelly

    Auckland council get a fairly good deal out of this

    They don’t have to make principle repayments to the Govt for 35 or 50years, but they are receiving principle repayments back from AT (in the form of table loan repayments)

    I suspect that is why they are paying 125bps extra over the govt bond rate, they get free use of the principle repayments from AT for 35 or 50 years…….

  • LucyJH

    is it as good a deal as Wellington got when the government agreed to spend almost $400 million on upgrading their trains? For a city the third the size, with much lower population growth and a much better rail network to start off with…. seems pretty generous.

    http://www.transport.govt.nz/ourwork/rail/wellingtonmetrorail/

    • Publius

      And people wonder why Aucklanders resent Wellingtonians. If it wasn’t for the Govt being located there they never would have got their trains.
      Don’t even mention Te Papa.

  • This deal, with all its tricky detail has the pawprints of the Hon Steven Joyce all over it. Slyly getting AC to fund a PR boost for the government…. typically devious. Still, we get the trains, now we just need to get a government that will allow us to invest in a decent network for them to run on.

  • ejtma2003

    This is a good deal for Auckland Council, and I suggest anyone who believes otherwise does some research on the GFC and the impact it has had on funding costs for organisations who are not rated AAA or AA. Reality is 125bps is a very fair margin, Auckland Council would have found to raise the money themselves to be much more expensive and if they were lucky would have got a 5 or 10 year term secured over the ratable income, and a sinking fund, so on a cashflow basis would have been a far bigger drag.

    Through this deal the council have cheap funding, a 35 and 50 year loan term, secured interest rate as the Government can obtain this type of funding. Most if not all NZ Banks can’t raise money this cheap, the Council would not get a better rate than a bank.

    I would suggest that yes it does have the pawprints of Steven Joyce and John Key, as they understand how the money goes round, and the cost of funds, and they have done Auckland Council a favour. A round of applause should be due.

    • It is undoubtably good that we are getting the the EMUs. But is it ‘a good deal for Auckland’? It’s pretty clear from the above that it is not. Either compared to Wellington’s deal or once you look at the details of this deal on its own merits. National Party MPs are running around saying ‘they’ are funding rail in Ak and this is clearly false. AT and AC are funding electrification, and the earlier improvements Dart etc were voted for and funded by the previous government. This is the self serving trickiness you get from these wide boys in gov., not clever business deals for the people but for their own PR ends.

  • SteveC

    is there a fishhook in this funding deal? do the EMUs have a specification that would allow them to climb the steeper gradient of the CRL?

    • Matt L

      Yes they will be powerful enough for the CRL, that has been one of the key requirements and is a key reason why the three car trains have two motor cars.

    • Publius

      Yes the EMU tender required EMUs which could cope with the CBD Link tunnel grades which is why we have very powerful EMU’s compared to overseas EMUs, and possibly (someone else might like to chip in) why the Electric Locomotive idea got thrown out and replaced by more EMUs as I doubt the locomotives would have made the grade so to speak (wheel spin).

  • Publius

    @Matt L
    BTW your June and August links are broken. They are missing the h of http

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